The Role of Accounting in Mergers and Acquisitions

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accounting in mergers and acquisitions

Mergers and acquisitions don’t fall out of the sky fully assembled. Instead, they require countless hours of meticulous effort throughout their different phases, placing demands on team members across an entire organization. At Banks Finley White & Co., we believe that accounting plays an important role in any merger or acquisition that wants to be successful. 

Sound Accounting is the Key to Success

Before closing out marathon sessions with bankers with hopeful smiles and firm handshakes, an accurate and reliable foundation must first be established. Ownership will have an idea of what goals they want to achieve. Accounting must provide a secure foundation for ownership to reach their goals. 

Sound accounting is key for successful negotiations—that should be established and ready to sell in the first place. Make sure your ledgers are clean, old balances are taken care of, and everything is in full compliance with US GAAP. The classification of assets and liabilities as current and noncurrent will be particularly important as components of networking capital. This could have a substantial impact on cash––something that buyers and sellers alike are tuned into.

As a whole, all of the accounting should be straightforward, precise, and compliant. Since both mergers and acquisitions create an abundant amount of work for everybody else, these accounting efforts need to be done in a timely manner, preferably as soon as possible to prevent delays and time crunches. 

Buyers need assurance that the target business is not one of those struggling subsidiaries that will want standalone financials. Granted, generating those standalones can be a time-consuming and highly-involved process––especially during audits. 

Whether the entire company is on the sales block, or just a component of it, bankers and advisors will assemble all of the financial information. Accounting will be expected to answer questions throughout the process and provide certain key documents including:

  • Confidential Information Memorandum
  • Data Room

  • Sale Agreement

  • Deal Model

Navigating Sales

Once your Deal Model is in place, and marketing is in full swing, bankers will offer the CIM to interested parties. In general, a merger and acquisition is complex, and will typically require multiple rounds of due diligence that include accounting.

No deals are exactly alike, but this outline can give you insight into the process.

First-Round Bids

The due diligence around initial bids revolve around the information within the CIM. This information is enough to provide a first-round bid––a nonbinding bid or multiple bids potential acquirers are willing to pay for the company.

Second and Third-Round Bids

These are the bidding rounds where non-disclosure agreements are executed and the data room is opened up to interested parties. This is where due diligence becomes more exhaustive and detailed, resulting in follow-up questions that require more in-depth financial information.

Also, second and third-round bidding will involve a series of due diligence calls that include all involved parties. This phase of the process will last about four weeks. Prospective buyers will provide a marked-up scale agreement along with their second or third-round bid. Once the bid is received, the CFO and legal counsel will sit with potential buyers to weed out the details of the sale agreement, with the end result being a signed deal.

In order to close the deal many conditions will have to be met, including:

The buyer must have sufficient financing.

The agreement is subject to regulatory review and approval from the FTC.

The seller must meet certain restrictions between signing and closing, usually requiring the business to maintain consistency with normal operations.

Once the deal is finalized, the new owners are able to take over.

Post-Closing: Sealing the Deal

There might have been a few hiccups along the way but, as is usually the case, the attention to detail has paid off. Now comes a whole set of post-close challenges with different requirements.

For example, the purchase price might include a mechanism for a cash settlement of the difference between a networking capital peg, and the final net working capital between the buyer and seller. In this situation, the seller provides a final net working capital calculation––which will determine how much cash the buyer provides the seller in an NWC shortfall. Then, cash moves from seller to buyer if the final NWC was greater than the peg number.

This type of calculation is typically assembled by the seller’s accounting team and requires a thorough review by the buyer’s own accounting department.

In another situation, post-closing responsibilities might include specific shared services functions. For example, if the seller’s larger corporate entity executed payroll, the buyer would have to sign a Transition Services Agreement (TSA) that requires the seller to provide those payroll services for a certain amount of time. The transaction will carry out other accounting implications for both the buyer and seller as well.

For more information about our accounting services, contact Banks Finley White & Co. today.